China's wind farms: Looking good and promising

By Haibing Ma and Lini Fu

In 2010, China overtook the United States as the global leader in installed wind power capacity, representing yet another triumph in the much-hyped clean tech race between the world’s two largest economies. Looking beyond the numbers, however, the true nature of China’s wind energy development appears far more bleak. 

According to the newest data released by the Chinese Renewable Energy Industry Association (CREIA), by the end of 2010, China had installed a total of 41.8 gigawatts (GW) of wind capacity, just ahead of the U.S. total of 40.2 GW. Even more impressive is the growth of China’s wind sector: while the United States added only about 5 GW of new capacity in 2010, China installed 16 GW. In 2009, China surpassed the U.S. to become the world leader in clean energy investment

So why aren’t China’s top energy policymakers celebrating the recent wind capacity milestone, given the country’s unprecedented achievements in renewable energy development? Instead, in a January meeting, officials with the National Energy Administration (NEA) lamented the fact that China still trails the U.S. in the amount of wind power connected to the grid—with only an estimated 31.1 GW grid-tied by the end of 2010. 

The reality is that a significant share of China’s installed wind capacity is not connected to any grid. This is wasting a significant amount of investment—not to mention energy. The positive side is that the central government is addressing this problem in a more rational way, which hinders China’s policy-making is embracing a more sustainable approach as well. 

From “Abundant” to “Redundant”

Maybe Zhongdian Wind Power Company can explain what’s really going on. At one of its wind farms in Jiuquan, Gansu Province—one of China’s seven planned 10 GW wind bases nationwide—as many as 80 percent of the turbines were not in operation during a seemingly perfect season for wind generation. In fact, throughout Guazhou County, where the Zhongdian farm shares development space with 20 other wind companies, only about a fifth of the installed wind capacity is even connected to the grid. 

This is the case with almost every wind base across the country. In Western Inner Mongolia, abandoned wind power has cost companies billions of Yuan in lost revenue. About half of the installed wind capacity in northeastern China is currently not in use, amounting to as much as 35 billion Yuan (US$5.4 billion) in unrealized investment. Nationwide, according to a rough estimate, one-third of China’s wind power projects have trouble accessing the grid. 

China’s grid-connection problem is twofold. For one, many local grids lack the capacity to absorb wind-generated electricity. Meanwhile, there are limitations in the grids’ capacity to transmit power to distant regions. Yet addressing the problem requires more than just a technical fix, and ultimately reveals fundamental challenges in Chinese energy policymaking. 

The highest energy demand is in China’s central and southeastern regions, but the country’s most abundant wind resources are located in the north. Yet the less-developed north simply cannot absorb its rapidly growing wind power capacity. In Inner Mongolia, grid-connected wind capacity has roughly doubled each year for the past four years, from a reported 170 megawatts (MW) in 2006 to some 8.7 GW by the end of 2010. The region has seen a shift from no restricted grid access for wind farms in 2006 to restrictions facing nearly every regional wind farm in 2009. 

It’s not that regional grid managers are opposed to wind power. The locally owned Inner Mongolia Grid Company has sought to accommodate wind power to the extent possible, despite the fact that the instability of wind-generated electricity can compromise grid safety. Chinese industrial experts have warned that wind power should not exceed 10 percent of local grid capacity to avoid the risk of a grid collapse. Yet in April 2010, the Western Inner Mongolia Grid Company achieved an average of 11 percent wind power—peaking at a record 18.7 percent—and the entire grid continued to run stably

One reality that has stymied wind power in northern China is the long winter heating season, which can last up to 8 months. The steam turbines used to provide heat to residents must simultaneously generate electricity. With heating being a top winter priority, local grid companies have to restrict the amount of wind power, which is less stable than coal power, to ensure the full capacity of the turbines. Ironically, China’s wind resource is much stronger in winter, which makes the grid-access problem even more frustrating for the wind industry. Wind companies in Inner Mongolia lost some 500 million Yuan (US$77 million) in revenue due to the estimated 900 million kilowatt-hours (kWh) of reduced generation in winter 2010. 

From Transmission to “Trespassing”

One obvious solution would be to transmit northern China’s “redundant” wind power to other regions of the country where it is desperately needed. In principle, this electricity would still be competitive with coal-fired electricity at the user end (see Chinese estimates here and here). But the long-distance transmission approach hasn’t worked as smoothly as expected either. 

China needs to significantly upgrade its transmission capacity to accommodate more renewables

In reality, the existing transmission lines in China’s wind-abundant areas have very limited capacity and can no longer support the region’s rising transmission needs. The Western Inner Mongolia grid, for example, has only two outgoing transmission lines to connect to the Huabei grid. Built more than 20 years ago, these two lines are able to transmit only up to 3.9 GW during the day and 2.5 GW at night, far less than the installed generation capacity of regional wind farms. 

So why not just build more transmissions lines? Because when it comes to actual project implementation in China, the “who” normally matters more than the “how.” In the case of Inner Mongolia, the local grid happens to be the only provincial-level network that operates independently of China’s State Grid Corporation. Thus, when an ultra-high voltage (UHV) transmission line is needed to link the Inner Mongolia grid to the adjacent Huabei grid (which belongs to the State Grid), questions arise about who should shoulder the tremendous infrastructure investment. As a small provincial company, the Inner Mongolia Grid simply cannot afford such a project. And while the State Grid has the financial capacity to invest in multiple UHV lines, it lacks sufficient incentive to do so. 

As a consequence, grid capacity presents a huge bottleneck to Chinese wind development, and the issue is not likely to be resolved easily considering the interests involved. This reality is no secret to the Chinese people, especially those in the energy industry who are well aware that grid projects usually take much longer to be approved and built than wind farms.

So why is China rushing into wind investment when the grids are not ready?

From Green Incentive to Self Interests

A large part of the problem lies with the incentive structure facing local officials in China’s wind-abundant regions, which are also the country’s least developed. To attract investment and boost GDP, local governments have sought to “lure” as many wind power projects as the land can take. After all, local GDP statistics will capture the economic effect of new wind installations regardless of whether the projects end up generating electricity for the grid—making the issue of grid access little more than an afterthought. 

Wind power companies, meanwhile, have their own incentive to “ignore” the potential grid capacity problems when pouring money into wind farm construction. Most of the larger investors are state-owned energy companies who are highly aware of the central government’s drive to improve the share of renewables in China’s energy mix. These companies are happy to report a large number of wind installations to show how aggressive and effective they were at following the government’s call to prioritize renewable energy development. Having done their part as energy producers, they are happy to let the grid companies take the blame for any negative outcomes (such as the grid-access problem.) 

It’s likely that the central government is well aware of the “little tricks” that local governments and individual energy companies are playing, but it simply lacks the capacity to micromanage all ground-level developments. China’s central planning administration, the National Development and Reform Commission (NDRC), did make an effort to require approval for all new wind projects prior to construction, but this applies only to projects with planned installed capacity above 50 MW. For smaller projects, local governments are tasked with making the calls. As a result—and perhaps not surprisingly—a survey reports that most wind farms built for China’s northeastern grid have an installed capacity of precisely 49.5 MW

A New Hope

It is clear that China’s wind power development still faces tremendous problems, despite the impressive growth it has achieved over the past five years. It is also evident that the challenge limiting its further growth is no longer technical, but is rather deeply tied to administrative and policy challenges as well as to imbalances among interest groups. 

The good news is that the central government is aware of these issues and has begun to take rational steps toward a healthier development path. In September 2009, the government issued an order to prevent overheated capacity in clean tech manufacturing. Moreover, top NEA official has recently indicated that, for the 12th Five-Year Plan period (2011–15), a major task of the agency will be to invest heavily in grid infrastructure projects as a way to address the grid-access problem. Meanwhile, the NEA is lowering China’s 2015 goal for total wind installation to below 100 GW, to match the State Grid’s goal for wind-access capacity. 

Such moves from the Chinese government imply a paradigm shift from focusing primarily on widely touted numbers and rankings to considering issues of quality—not just in wind power but in the economy as a whole. This path is much more compatible with the Green Economy approach promoted by the United Nations Environment Programme and suggests that in the coming years, we may see many more Chinese policies heading in this positive direction. 

In the following months, Worldwatch Institute will be releasing a research report exploring China’s green economy potential and green job opportunities. We will be blogging about many of the report’s findings in advance, so please stay tuned.

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In Copenhagen on February 25th, the European Environmental Agency (EEA) hosted the launch of State of the World 2011: Innovations that Nourish the Planet. Nourishing the Planet co-Project Director, Danielle Nierenberg, and Worldwatch President, Chris
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The following blog entry was written while performing research for a Vital Signs report on Carbon Markets. To learn more about Worldwatch’s Vital Signs click here.

The European Union’s Emissions Trading Scheme has been under public scrutiny over the past couple weeks after officials found that cyber-criminals had breached security on its registries to steal and sell $40 million worth of carbon emissions permits. The breaches forced the European Commission to suspend trading on the EU-ETS for two weeks so that it could reexamine its regulatory strategy before finally reopening on February 4th.

The fraudulent activity involving the EU-ETS has primarily economic, rather than environmental, ramifications. The environmental integrity of the cap – the scheme’s ability to contain carbon dioxide emissions – has not been compromised. Only when governments generate more permits or regulators fail to correctly measure emissions from regulated sources is the cap compromised. Rather the effect of the events is to cripple trader confidence and raise transaction costs in a way that undermines the economic efficiency of the market.

Because EU member states wanted to maintain sovereignty over their fundamental institutions when the EU-ETS was implemented in 2005, the European Commission set up an emissions trading scheme with carbon permit registries in each member country, meaning that there are now 30 semi-independent registries (including non-EU member states) across Europe that keep track of trading and ensure the credibility of the carbon permits.

Consequently, the EU-ETS effectively operates as 30 linked carbon markets. As a policy mechanism for establishing a price on greenhouse gas emissions, one of the theoretical advantages of carbon markets is the potential for local and regional schemes to be linked up to form a global, more efficient, market. Well-publicized security breaches do few favors to those hoping to develop such a system.

VAT Fraud and ‘Phishing’ Scams

Despite receiving widespread attention only recently, fraudulent activity has been a problem for the EU-ETS since 2008, initially in the form of Value-Added Tax (VAT) fraud. In some European countries, governments treat carbon permits as a taxable consumptive good, and so those governments place a tax on the transfer of carbon credits called a value-added tax. Criminals found a way to exploit the tax-code variation among countries by opening trading accounts, buying permits in countries without a tax and then selling them in countries with a tax. Through repeatedly buying and selling the permits, criminals generate large amounts of money from the VAT that they then disappear with before the VAT is collected.

As countries have modified their tax codes, trading volume between countries with and without value-added taxes have since dropped as much as ninety percent. The European Law Enforcement Agency (Europol) still estimates that VAT fraud from carbon trading has caused as much as €5 billion worth in damages to European taxpayers, and the problem continues. Most recently, Italian police are investigating a carbon trading volume spike with suspected VAT fraud motives that occurred in November 2010 on Italy’s own energy market. The tax revenue lost due to VAT fraud from carbon trading represents only a small fraction of the tax revenue lost due to VAT fraud in Europe, however. A 2007 report published by the International VAT Association estimated that VAT fraud causes €60 to 100 billion in losses to European taxpayers each year.

Another more recent tactic for swindling money from the market involves “phishing” scams. In a phishing scam, the criminal attempts to obtain an account holder’s user name, password and any other necessary information to steal their identity. Account holders on the German registry were the first to be hit by a major phishing scam in January 2010. BBC News reported that the criminals involved with the scam obtained access codes for registry accounts through emails that led targeted account holders to forged websites asking them to input security codes. The criminals then accessed the registry accounts and sold the permits held in the accounts on Danish and British registries for $4 million.

The German incident triggered the European Commission to explore ways to improve security. In October 2010 the Commission issued a new directive to standardize and secure the system of registries. Ecosystem Marketplace reported that the directive called for long-term policy changes including a more consolidated registry system as well as short-term policy changes for upgrading the security systems on the registries. When hackers broke into the Czech registry this past January, however, the registry was one of 14 out of 30 that had not yet upgraded its security system. It was, in fact, set to upgrade its system within the week that the heist occurred.

Emerging and evolving markets, such as carbon trading, are most at risk to fraudulent tactics as both the implicit and explicit rules for operating those markets are less standardized. The market is maturing, however: $120 billion worth of emissions permits changed hands across the EU-ETS in 2009 according to the World Bank. Establishing rules for the market and implementing strong security measures will be crucial for the carbon market to continue to expand.

Possible Design and Security Improvements

More thorough trader account registration and tracking process

For both VAT fraud and phishing scams, criminals must set up trader accounts on the EU-ETS before executing fraud. The European Commission will no doubt be taking measures to improve the vetting process for creating accounts. Making certain information available to traders regarding the experience and reputation of other traders may also help increase security by empowering buyers and sellers to make safer decisions about who to engage in trading.

Near real time recording on EC’s Community Independent Transaction Log

The current transaction monitoring system setup across registries only allows transaction history to be checked manually on pieces of paper. Because of the trouble involved with such a system, traders rarely take heed of the risk that they may be handling stolen permits. The European Commission’s October 2010 Directive includes in Article 4 to “establish the European Union Transaction Log (EUTL) in the form of a standardised electronic database”.

Stronger IT security for all stakeholders

Among other security measures, the Czech registry was in the process of installing a system that required traders to enter a secondary, randomly-generated, password sent to the trader via mobile phone. The idea is similar to verification codes on the back of credit cards, and registries should adopt other security practices used by the finance industry such as using only registry websites for direct correspondence and trader email addresses only for sending notifications and trade confirmations.

A harmonized tax code dealing with carbon trading

The IEA released a report in 2010 mentioning specific areas that must be harmonized across linked markets including monitoring, reporting, and verification standards; offset provisions; auction floor prices; cost-containment reserves; and banking and borrowing. Tax codes dealing with the treatment of carbon permits could be added to the list.

How Would a Global Carbon Market Be Coordinated?

Tackling these issues requires skillful coordination between the linked markets. But if linked carbon markets grow to encompass more than just the EU, how will they be interconnected? Will these issues continue to be solved by an executive body such as the European Commission, or could they possibly be better solved by a deliberative body creating open standards from which the carbon trading platform is developed? Right now that is a very open-ended question.

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By Mara Schechter

In the United States, grass-fed beef producers could reduce their annual greenhouse gas (GHG) emissions by 87.5 percent, according to a recent report by the Union of Concerned Scientists (UCS). Raising the Steaks: Global Warming
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Following the launch of State of the World 2011 in Finland, Nourishing the Planet has had some exciting coverage in the Finnish press.

Check out this article in Verkkouutiset on innovations in urban agriculture that are working to improve food sec
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